Chapter 16 – Pricing Concepts and Strategies
Pricing Objectives and the Marketing Mix
1. Profitability Objectives
Marketers at firms must set prices with profits in mind.
For customers to pay the set price, they must be convinced they are receiving fait value
for their money.
Marketers must be able to balance between desired profits and the customer’s perception
of a products value.
Marketers should evaluate and adjust prices continually to accommodate changes in the
Marginal analysis is the method of analyzing the relationship among costs, sales price,
and increased sales volume.
Profit maximization is the point at which the additional revenue gained by increasing
the price of a product equals the increase in total cost.
Marketers commonly set target return objectives, which are short or long run pricing
objectives of achieving a specified return on either sales or investment.
2. Prestige Pricing
Prestige pricing establishes a relatively high price to develop and maintain an image of
quality and exclusiveness that appeals to status conscious consumers.
Cost if the primary factor that makes you want to own the product since the high cost
makes ownership prohibitive.
3. Meeting Competition Objectives
In many industries, firm’s set prices to match those of established industry price leaders.
Pricing objectives tied directly to meeting prices charged by major competitors de-
emphasize the price element of the marketing mix and focus more strongly on nonprice
i. Value pricing – a pricing strategy emphasizing benefits delivered from a product
in comparison to the price and quality levels of competing offerings.
this strategy works best for relatively low priced goods and
The challenge for those who compete on value is to convince
customers that low priced brands offer quality comparable to that
of a higher priced product.
As a result many alternative and private label brands have
emerged which creates more competition in the marketplace in
4. Volume Objectives Some economists believe firms will set a min. acceptable profit level and then seek to
max. sales in the belief that the increased sales are more important in the long run
competitive picture than immediate high profits. As a result, firms will expand sales s
long as their total profits don’t drop below the minimum return acceptable to
Another volume related pricing objective is the market share objective. This is when the
goal is to achieve control of a portion of the market for a firm’s good/service.
1. PIMS studies
Market share objectives may prove critical to the achievement of
other organizational objective.
Profit Impact of Market Strategies Project is research that
discovered strong positive relationship between a firm’s market
share and product quality and its return on investment.
Factors influencing profitability were a firms market share and
product quality. The greater the market share of a firm (>40%),
the greater return on investment they experienced (32%).
Compared to those (<40%) experienced an avg ROI of 24%.
Firms with large shares accumulate greater operating experience
and lower overall costs relative to competitors with smaller
5. Pricing Objective of Not for Profit Organizations.
i. Even though the definition is not to have profitability as the main goal, there are
areas where profit max. is key. For example the min. amount you have to pay for
a plate of food at a charitable event.
i. Not for profit organizations attempt to recover only the actual cost of operating
i. Some not for profits offer a free service to encourage increased usage of the good
or service. For example, a bus transit system giving free rides on Canada day so
on days when the roads are congested, they can use the service and gain a new
i. High prices help to accomplish social objectives independent of the cost of
providing goods or services.
Methods for Determining Price
1. Supply and Demand
Demand refers to a schedule of the amounts of a firm’s product that customers will
purchase at different prices during a specified time period. Supply refers to a schedule of the amounts of a good or service that will be offered for
sale at different prices during a specified period.
2. The concept of elasticity in pricing strategy
i. Measure if the responsiveness of purchasers and suppliers to a change in price.
Elasticity of demand
i. % change in the quantity of a good/service demanded divided by the % change in
Elasticity of supply
i. Responsiveness of producers to changes in the price of their goods or services.
As a general rule, if prices rise so does the supply
ii. Elasticity of supply is measured as the ratio of proportionate change in
the quantity supplied to the proportionate change in price. High elasticity
indicates the supply is sensitive to changes in prices, low elasticity indicates
little sensitivity to price changes, and no elasticity means no relationship with
price. Also called price elasticity of supply.
Determinants of elasticity
i. Availability of substitutes/compliments